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The Structure and Measurement of Innovation

How do the best companies grow? They innovate, then build market share and memory structures to reinforce it.

Innovation is one of the most important precursors to building a long term growth engine for your business. The companies with the strongest brands, most motivated employees, and healthiest investor bases are typically those where their top stakeholders are invested for the long term. They have customers, employees, and investors committed to the future growth of the organization. Growth doesn’t come from cutting costs or making systems more efficient — it comes from expanding product and service offerings into new markets.

That’s why innovation is so important. It advances business systems, creates new markets, and reinvents your customers’ experiences with your brand. But to be truly innovative, your innovation requires two things: structure and measurement.

Innovation requires structure

There is a discipline to innovation, or as Peter Drucker writes in the Harvard Business Review, “innovation is real work, and it can and should be managed like any other corporate function. But that doesn’t mean it’s the same as other business activities. Indeed, innovation is the work of knowing rather than doing.”

As a corporate function, it has to have a structure. Structure can either be a strategic investment in an innovative culture that pulls good ideas from all areas, levels, and geographies, or it’s the process used to go after innovative ideas.

Structured Innovation as Culture

An innovation structure can be in the strategic culture created to encourage and inspire innovation. While some companies pull innovation out and create specialized centers of innovation, there is a growing argument for a dispersed innovative culture. Innovation, now more than ever, is expected to come from all levels and areas of the company. It’s not just strategy teams at the top level, but even front line workers have a unique perspective that companies can use. One of the greatest reasons for building an innovation culture is to increase participation, thus increasing testing and feedback for improvement of ideas.

It should enable and reward thoughtful risk-taking. Every company has to have their own system for creating an innovation culture. For Percolate we use our company values as a rubric for decision making. These values, along with our biannual Hack Days and clubs, help foster a culture of ownership, improvement, and ultimately new thinking. Our founders were strategic about how they created these values.

It’s not just company values and ethos that foster innovation, it’s also more concrete systems that drive innovation cultures. It can be in the form of paid free time for side projects, rotational programs in an innovation lab, or training. Google and 3M are two examples of Fortune 500 companies that have invested in creating a culture of innovation through this type of systematic culture building. They both famously allow every employee a certain amount of their time to work exclusively on pet projects.

3M’s culture of innovation dates back to its founding in 1902 — it is the birthplace of Masking Tape and the Post-it Note, Google’s innovation culture began from its start too, almost 20 years ago in 1998. So how do you build that culture from the ground up? The culture of innovation can be created through a number of steps:

1. Make it clear to everyone the intent of innovation: This is an attitude that starts at the top. The whole organization should feel the sincerity and importance of innovation. More than that, the intention of innovation is to advance the business. It should align with the company’s greater business goals.

2. Structure what seems unstructured: Free thinking isn’t free, so offer the paid time for side projects, offer rewards in the form of bonuses, training, or promotions for good work on innovation, and rework performance measures to include participation in innovation projects.

3. Offer support, but also know to step back and let happen: Make sure that you offer innovation training and tools first, but then give your employees the time and space for magic to happen.

4. Measure what is most important and make sure people know: Performance measurement itself can act as incentive for your employees to take on side projects. Early in a project, the ideas for the outcomes should help guide setting metrics.

5. Create the space for it: it may seem cheesy, but swag, posters, and company lore encourage innovative thinking. One anecdote comes from Google when Sheryl Sandberg made a bad decision that cost the company a lot of money, and Larry Page’s response was:

“I’m so glad you made this mistake, because I want to run a company where we are moving too quickly and doing too much, not being too cautious and doing too little. If we don’t have any of these mistakes, we’re just not taking enough risk.”

Structured Innovation as Process

An innovation structure is also a process that goes from thinking to building to selling, with built in feedback loops. Whether innovation is just part of the company culture where employees are thinking about it in their day-to-day or it is housed in an innovation lab that sits apart from the rest of the company, there are steps in innovation. Every innovation lab outlines their own process, but they all have essentially the same ingredients: strategic thinking, brainstorming, prototyping and testing, feedback, and then eventually development and commercialization.

I like the process outlined by Stanford’s d.school. The d.school is their Institute of Design which teaches a designer’s approach to innovative and strategic thinking, where you start your process by looking at problems through the eyes of the human beings who are facing the problem themselves. It’s the “first principles” approach to innovation thinking. Here’s the process:

Empathize: What this really means is taking the design ethos of human-centered exploration and using it for strategic thinking. You think about who the innovation would ultimately serve. In the case of product design you think about what problems your user has, what they need solved, and how they would use a tool intuitively.

Peter Druckers’s classic quote from The Practice of Management (1954) captures what this step is all about:

“The important and difficult job is never to find the right answers, it is to find the right question.”

Define: This is when you take all the things you’ve learned from your information gathering, and use them to set research goals that will guide the project. This is also when you start to outline your research metrics.

Ideate: This is the fun part. You start as wide as possible and explore a wide space of ideas, research routes, and potential hypotheses.

Prototype: Here’s when you build a version or process to test. This is usually the moment when executive (or external client) sponsorship is key, because it typically frees up the budget to build something.

Test: See how the prototype is received, used, and understood. Use this time for feedback. Feedback loops come from participation. When we talk about responsive enterprises we are talking about those enterprises that bring feedback into their decision-making constantly. The testing phase is also when the future commercial possibilities should start looking more feasible.

Develop: If your prototype testing works, size the market, start thinking about productizing. Then put it into development for larger distribution.

Market and Sell: You’re about to launch a new product, service, geography, or customer segment. Congratulations!

Measurement at Each Step of Innovation

The first part of effective innovation is setting up structure for it. The second part is measurement. Why is it so important to define innovation metrics? There are two main reasons: (1) better results and (2) as a way to appease investors. Investors are important because they give your company the capital to grow. The problem is, as Ilan Mochari says,

“If you invest millions in R&D with no discernible short-term payoff, what does an investor see? Only a reduction of cash with no measurable increase in [the] ratios.”

Simply put, it requires a measurement of leaders, employees, and customers, looking at what ideas they are bringing to the table, how are they acting on them, what happens from there to not only demonstrate the right kind of progress that shows strong financial potential, but more importantly to help deliver on innovative ideas.

It seems simple enough, but the reality is that most companies are still struggling with it. It was reported that one-third of Fortune 1000 companies do not have innovation metrics and McKinsey reported that 77% of business leaders see innovation as a priority, but only 22% actually have innovation performance metrics. The fact of the matter is that innovation is hard to measure.

Measurement comes down to a matter of understanding your inputs and outputs. Looking at innovation as part of a strategic company culture or as a process implemented at an innovation lab, the inputs and the outputs are what will define not only the quality of innovation but the also the metrics.

Soren Kaplan writes in a Fast Company article that, when it comes to innovation, think of the old adage: garbage in, garbage out. If you aren’t able to measure what you are putting in, you probably aren’t going to be able to measure what comes out on the other side, and frankly, if you can’t measure what you’ve produced, then you’ve probably wasted a lot of time and money.

Think of your inputs and outputs having three different angles that must be considered: financial, organizational, and leadership.

Financial Metrics

This is your ROI measure. However, when it comes to big, disruptive ideas that come from innovation, the thinking often follows this quote from Langdon Morris in an InnovationLabs white paper:

“It’s an accepted joke in the research and development community that the term ‘ROI’ really stands for ‘restraint on innovation,’ because ROI-based assessments tend to embrace short term thinking and to exclude the development of long term, breakthrough, and discontinuous ideas and projects.”

But the truth is that financial measures can help keep teams accountable to the strategic initiatives and also justify the investment in innovation. Financial metrics should be set when the project is getting defined. The financial metrics aren’t going to necessarily be straight “ROI” calculations, they should look be defined for the inputs and the outputs. Here are several financial input and output measure that can be used:

Organizational Metrics

These are the measures that examine the process of innovation. They are what help enforce a culture of innovation throughout the entire organization. Think back to the examples of 3M and Google. For their free-thinking time in the workday to be effective, they have to have measures that guide the performance.

Here are organizational metrics:

Leadership Metrics

These encourage behaviors in an organization’s leadership that foster an innovation culture. Leadership metrics enable managers to do two things: champion great growth projects, and help remove barriers standing in the way of an idea becoming a prototype and eventually out to market.

You must start with giving your leaders the tools and training for innovation. You can measure their output by seeing how they have taken on new responsibilities and how many successful projects they have sponsored.

This is what your leadership metrics could look like:

There’s no one size fits all approach to innovation and therefore innovation measurement. It has to be a mix of hard numbers and more qualitative measures that must align with your company’s greater business goals. There are a few basic things that all innovation requires though. Innovation requires planning. It requires measurement. And it requires failure. Failure leads to learning. There is no success in innovation without learning and responsiveness to feedback. From there, comes growth.